401(k) Enrollment: How To Get More Employees Saving

More 401(k) plan sponsors are trying new ways to motivate employees to enroll in the company’s 401(k) and save for retirement. According to Deloitte’s recent defined contribution survey, plan sponsors are increasing communications, while beefing up education and financial wellness tools. Per the Deloitte 401(k) survey, a whopping 74% of respondents are using communications, such as promoting their plan’s automatic escalation feature, in an effort to increase deferrals. More than half are providing investment and financial market education – all in the hope to get more employees enrolled in the 401(k).

Plan sponsors are also including new features to encourage enrollment and savings. Deloitte found that 67% of plans offered 401(k) auto enrollment, up from 62% in 2015, and 55% in the 2013-2014 survey. And more plan sponsors are ensuring that employee deferrals ratchet higher over time. Auto escalation or “step-up” features were offered in 64% of plans in 2017, up from 46% in 2013-14.

Despite these efforts to bolster their employee’s retirement savings, many plan sponsors realize something is missing. While enrollment rates have improved in recent years, there are still plenty of employees who fail to enroll in the company 401(k). When asked about the reasons for not saving into the plan, 28% of plan sponsors reported that a “lack of awareness or understanding” was the primary reason employees did not participate in their plans. Given that this is the employer’s perception, certainly there may be other barriers to enrollment. However, this “lack of awareness” was the top reason reported by plan sponsors in the last three consecutive surveys.

How to motivate employees to enroll in the 401(k)

At ForUsAll we’ve done some of our own research on what prevents employees from joining the company 401(k). And it’s our experience that increasing the quantity of information available may or may not improve participation and contributions. In fact, even high quality information may not be as effective as you might expect.

We think the key to driving employee engagement is to present all 401(k) information – from notification of eligibility to fund selection – in an engaging manner.

To learn more about what motivates – and what shuts down employees – we had our virtual advisor DAVE ask employees at a 500-person company why they hadn’t yet joined the 401(k). Here’s what we found:

• 40% said they were “too busy”
• 19% said signing up was “too much hassle”
• 41% said “money was tight”

It makes sense that employees under financial strain might put off enrolling in the company 401(k), particularly younger employees. But the reason that 59% of employees didn’t join the plan was that it was just too difficult.

This bit of research, along with our experience as a 401(k) advisor, leads us to suggest five ways to improve engagement with your company’s 401(k).

Five ways to get high enrollment and engagement in your company’s 401(k)

Rule #1: Make sure enrolling is a snap

In our above example, 59% of those not enrolled might have signed up if enrollment had been easy and convenient. It turns out that pretty brochures are of little value to employees. In a plan participant survey, 67% gave the industry a grade of “C, D or F” for how it explains saving and investing. In fact, 30% said they put off investing because it was too confusing.

Research also suggests that onsite seminars may not be the best use of company time. Yes, an investment seminar can be great motivator, but often we humans quickly lose momentum. Behavioral research suggests that almost everyone claims they will make a positive change after attending a workplace seminar, but only 14% actually do.

Rule #2: Avoid TMI

Traditional retirement plan enrollment involves stacks of forms or website instructions buried deep in an employee’s email in-boxes. Then, once the employee gets around to navigating through the forms, she is asked to come up with an asset allocation, and then asked to pick funds to meet her investment goals.

All of these forms and choices can be too much information. This can particularly be the case when it comes to unfamiliar information. Employees can freeze up and wind up doing nothing. Or perhaps, seeing that enrollment is going to take a while, this activity will be postponed for another day, perhaps one that never comes.

Rule #3: Make things automatic

A sure way to get employees enrolled in the 401(k) plan is to enroll them automatically. Those who have no interest the retirement plan can simply opt out. But more than likely, simple inertia will keep them in the plan, allowing them to begin saving for retirement. Nobel Laureate economist Richard Thaler has studied the impact of “nudging” people into making positive choices. In face, he has he recommended automatic enrollment policies as long ago as 1994.

Rule #4: Deferral: Take it higher and higher

When using auto enroll you decide the default deferral rate for your employees. And here’s where many plan sponsors don’t follow the best practices for automatic enrollment. At a low rate, like 2% or 3%, it can take years to defer meaningful amounts toward savings, even with automatic escalations. At ForUsAll, we recommend 6%.

Rule #5: Re-think 401(k) enrollment communications

A 6% deferral rate with auto escalations is a great first step to increasing your employees’ odds of a successful retirement. With 1% annual increases, that 6% deferral will turn into 10% in just a few years. But engaging communications is the key to high participation and significant deferrals.

Here’s an example, of how we merge technology with engaging communication to get participants’ attention during enrollment.

Our advisor DAVE guides employees through the enrollment process based on their answers to each question. The employee gets the information needed to make each decision, but is not overwhelmed. We also use behavioral science to the plan’s advantage by explaining to new participants that they are already a member of the plan. That means if they opt out they are losing something. Humans hate losing things, a trait behavioral science calls loss aversion.

We also let employees know that the default savings rate of 6% is a basic starting point – not the recommended savings level. And, we remind tell them 6% is below the average savings rate. This type of information leverages a behavioral concept called “social proof.”

Finally, we make sure employees can boost their contributions at the push of a button. This approach overcomes the tendency to avoid taking action when overwhelmed with information, or forcing employees to make several decisions in unfamiliar territory.